Alphabet Soup Economy

Here’s what happens in our Alphabet Soup Economy:

Plan A doesn’t work…neither does Plan Z.

Last week ended with a whimper and a bang. Stock markets whimpered. Investors didn’t know what to think. And nothing happened last week to help them figure it out.

On the other hand, Black Friday was a bang. It showed retailers that if they wanted to bring shoppers out, they would have to cut prices a lot more than usual.

Conversation overheard in the check-out line at local grocery store:

“It’s crazy the way they carry on…I mean this Black Friday thing.”

“Yeah…it’s crazy.”

“If they could make money selling things so cheaply, why don’t they just cut the prices all year ’round…instead of making us crazy on one day of the year?”

“Yeah…it’s crazy…”

“You know what I think… I think they’re messing with us. That’s what I think. They know that if they give you some real discounts you’ll come to the store…and then you’ll buy something you didn’t intend to buy…and you’ll pay a lot for it. Otherwise, it doesn’t make sense. How can they sell a cotton sheet for $12 one day and then sell it for $10 the next day? Doesn’t make sense. I heard they lose money on everything they sell today. But I guess if they sell enough stuff…”

“Yeah…it’s crazy…but I don’t care if it’s crazy. I gotta go out and save as much as I can. Milton’s not getting as much work as he used to. He’s an electrician. I guess people have decided to live by candle light. Either that, or Milton is just goofing off.”

There are a lot of ways to look at what is going on.

When the crisis began in 2007 people thought we might be in for a little setback. They couldn’t imagine any fundamental change happening. As far as they could tell the US economy had been expanding for nearly 30 years with only minor periods of sluggishness. And the last 5 years had seen the biggest housing boom in history. Electricians worked night and day trying to keep up with it.

And who doubted that the USA’s financial system of buy now/pay later was the best form of capitalism ever created? As for America’s political system, was it not the crown of creation?

The rich were getting fabulously richer. But who cared? Everybody was getting richer. Everybody’s house was going up in price. If you wanted money all you had to do was to take out some of your accumulated equity.

Everybody was getting a bigger house and more stuff. Life was as good as it gets.

Then, in 2008, when Lehman Bros. went broke it became obvious that something was wrong. People began to refer to a “liquidity crisis.” Everything was fundamentally solid, said the authorities. Just a cash-flow problem caused by excesses in subprime debt, they thought.

‘Move along…nothing to see here,’ they said. ‘We’ve got it all under control.’

Then, the feds came up with Plan A…they would solve the liquidity crisis by putting in cash — about $5 trillion or so. The biggest intervention ever. If it had only been a liquidity problem, that would have done the trick. But it wasn’t a liquidity problem at all.

Still, the cash had an effect. The stock market started to bounce back. Then, the price of oil and commodities rose, which made things worse. Because it raised the typical household’s cost of living…without providing it with more money.

Unemployment grew worse. Houses kept falling in price. Experts began to refer to the “Great Recession” and to speculate about how long it would take for a full recovery.

The feds then came up with Plan B — ultra-low interest rates, cash for clunkers, shovel-ready projects and other stimulus measures.

But it wasn’t a recession either. Not even a great one. Recessions can be fixed by lowering the price of credit. Deals that wouldn’t work at a higher rate become attractive. The money flows. The deals get done. The economy picks up.

But that wasn’t happening. Gradually experts, commentators and average people are beginning to realize that there is something else going on. This is a period of de-leveraging. The problem with credit isn’t the price of it. The Fed has been lending money at zero interest rate for more than two years. But neither businesses nor individuals seem to be in the mood. Only the government will borrow and spend.

That’s when the Fed came up with Plan C — quantitative easing. If people won’t borrow and spend, the Fed reasoned, we can’t get money into the system through the banking system. So, we’ll try something else. We’ll print money and use it to buy US government debt. In effect, we’ll allow the federal government to spend money without raising taxes or borrowing the money from the public. This will increase the amount of money in the system. It will be like a stealth fiscal stimulus measure…one the politicians don’t have to vote on.

But Plan C didn’t work any better. Instead of going down, as they were supposed to, US bond yields went up…

Meanwhile, in Europe, there is the same alphabet soup economy. Same troubles. Even worse. There, the central bank is less willing to help. So even governments are tapped out. Lenders are afraid they won’t get their money back. One by one, the fringe countries ran out of credit. And now, the countries at the core are struggling too. Last week, even Germany had trouble selling its debt.

Plan A for saving Europe didn’t work. Neither did Plan B. Or Plan C. Now, poor Europe is running out of alphabet…running out of time…and running out of money too.

So, what’s going on? How can you best understand what is happening?

It’s a Great Correction. It is a period in which errors are corrected. What errors?

Oh…we were afraid you’d ask.


Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail Markets and Money.
Bill Bonner

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